The number of businesses that sought to liquidate under Chapter 7 bankruptcy protection rose 7% last month, indicating that the U.S. financial crisis is putting more struggling companies out of business.
In September, 3,836 businesses sought to liquidate under Chapter 7 protection, up from 3,576 in August. The number of companies that sought Chapter 11 protection fell by a nearly identical number, to 687 from 952 in August, indicating that the credit crunch is making it more difficult for companies to restructure.
The credit markets have seized up in recent weeks, cutting off financing to struggling companies. Some businesses “really have no choice but to file Chapter 7,” said Stuart Hirshfield, a bankruptcy attorney at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo.
The number of commercial bankruptcy filings across all chapters of the Bankruptcy Code continued climbed to 5,813 in September from 5,670 in August, according to Automated Access to Court Electronic Records, or AACER.
The effects of the U.S. financial crisis, which pushed Lehman Brothers Holdings Inc. and Washington Mutual Inc. into bankruptcy, probably won’t cause bankruptcy filings to rise dramatically until the second quarter of 2009, according to Jack Williams, the American Bankruptcy Institute’s resident scholar.
“Bankruptcy filing rate is a lagging economic indicator,” said Williams, who also teaches bankruptcy law at Georgia State University. “It’s usually about three quarters behind bad news.”
The American Bankruptcy Institute is predicting a total 1 million to 1.2 million bankruptcy filings in 2008, a 30% increase from 2007. “This is, in essence, kind of the cleansing cycle. It’s the tail of financial distress,” Williams said.
Companies in the retail, food services and auto industries are likely to be hardest hit by the economic downturn, according to Pat Lagrange, a managing director with Carl Marks Advisory Group.
“I think across those elements of the market that are consumer-facing or consumer-oriented you’re starting to see the impact,” said Lagrange, who is also the vice president of education for the Turnaround Management Association.
Indeed, it might not be long before some companies, especially retailers hoping for high sales over the holidays, find that consumer spending is just too weak to sustain their businesses.
Williams said a number of troubled retailers will wait to see how the holiday shopping season goes before they seek bankruptcy protection.
“Those candidates that are on the cusp are rolling the dice one more time,” he said. “Those companies that can access trade credit are doing it right now to the hilt, hoping they can sell their way out of financial distress.”
Lagrange, however, doesn’t hold out much hope for cash-strapped retailers. “This is likely to be one of the worst Christmases on record,” he said.
